Drop in remittance could pull economic growth down

KATHMANDU, June 15: If remittance entering the country were to drop by 10 percent, Nepal’s annual economic growth could drop by up to 3 percentage points compared to baseline forecasts, says a report from the World Bank.

Focusing on ‘Remittances at Risk’, the World Bank report highlights the possibility of near-term risk of a slowdown in remittances. “Over the last 10 years, remittances have increased substantially and they play an important role in Nepal’s economy,” it says.

Quoting data from the Nepal Living Standards Survey (NLSS), the report says: “Out of a total work force of 14 million, some 4 million Nepalis -- or 28 percent of the workforce -- are working overseas at present. Meanwhile, remittances have grown to more than 30 percent of the Gross Domestic Product (GDP), making Nepal among the highest remittance-recipient countries in the world, adjusted for size of the economy.”

“The reality is that remittances play a pivotal role in the Nepali economy,” Takuya Kamata, the World Bank’s Country Manager for Nepal, says. “Remittance is nearly 10 times larger than foreign aid and 2.5 times larger than total exports.”

Growth in remittance at a global level contracted in 2015 for the first time since 2009 as a result of a fall in oil prices which affected activity in remittance-sending countries, notes the report. Remittance inflows to South Asia declined as well but Nepal bucked the trend as remittance increased significantly in response to the 2015 earthquakes. However, a prolonged contraction in the departure of migrant workers is an early sign of a potential slowdown in remittance to Nepal. “A potential slowdown in remittance poses a significant near-term risk to Nepal because of its outsized role in the Nepalese [sic] economy,” says the twice-yearly Nepal Development Update.

“Should a slowdown in remittance occur, appropriate monetary and fiscal policy responses are required as well as enhanced supervision of the financial sector,” Damir Cosic, the World Bank’s Senior Country Economist for Nepal and lead author of the report, says.

Following the earthquake in April 2015, the outflow of migrant workers contracted for ten months in a row. In the first nine months of Fiscal Year 2016, the number of migrant workers declined by 25 percent year over year.

This is the steepest and longest decline since 2009, notes the report. One reason for this is that potential migrant workers chose to stay home to support their families to rebuild homes and livelihoods, it says, adding: “But a weaker demand for workers from oil- and commodity-producing countries -- for example Gulf Cooperation Countries (GCC) and Malaysia -- is likely to have contributed to this decline.”

Following two massive shocks which have resulted in two years of disappointing growth, economic activity is expected to rebound modestly, growing by 4.7 percent in FY2017, according to the report that has warned of a third shock -- drop in remittance -- that could pull the economic growth downward.

According to the report, the rebound in growth hinges on stabilization of the political process, effective mobilization of post-earthquake rebuilding efforts and the full normalization of supply of goods.

Nepal suffered devastating earthquakes in April and May of 2015, followed by a blockade along vital transit routes that brought trade and manufacturing to a near standstill between September 2015 and February 2016. “The overall impact of the trade disruptions has been nearly as large as the impact of the earthquakes resulting in the estimated growth rate for FY2016 to be lowest in 14 years,” says the report.The trade disruptions have further affected poverty-reduction efforts which were already hampered by the earthquakes in 2015, the report notes. “Shortage of goods has pushed up prices with inflation inching into double-digit territory affecting welfare with significant impact on the poor in Nepal.”

Despite recovery in economic activity in the forecast period, the report highlights that fiscal and external environments are likely to be less favorable. Fiscal deficit is expected to widen, as reconstruction efforts take full shape.

The government’s expenditure is expected to grow substantially after FY2016 owing to increase in earthquake-related expenditures. Revenues, however, is expected to pick up, but at a slower pace, resulting higher fiscal deficit.